What Happens If China's, Russia's Economies Fail?

The symptoms of financial meltdown so far—emaciated 401(k)s, bankruptcies, layoffs—haven't been easy to handle in the U.S. But Americans aren't the only ones feeling the pain. Anger over the worsening global economy boiled over last week resulting in protests in Greece, France, Latvia and Britain. At issue are rising prices, shrinking incomes and the disappearance of jobs. Fears that economic unrest will lead to political instability are widespread, says Ian Bremmer, president of Eurasia Group, a political-risk consulting firm, and Russia and China figure prominently in many forecasters' nightmare scenarios. In his forthcoming book, "The Fat Tail: The Power of Political Knowledge for Strategic Investing," Bremmer connects the dots between political disaster and economic turmoil and posits new ways to analyze and prepare for doomsday scenarios. He spoke with NEWSWEEK's Barrett Sheridan from his hotel in Moscow, where he was attending the Russia Forum, a conference for investors hosted by investment bank Troika Dialog. Excerpts:

NEWSWEEK: Russia is high on your list of big risks to watch for in 2009. Why?
Ian Bremmer: One of the most obvious reasons is that oil prices have gone from $147 a barrel to $40. Russia is a state that makes a lot of its currency on its oil production. They haven't been doing a lot of investment internally into improving the efficiency and productivity of their existing fields or developing new fields. And you also have geopolitical risk. That's on the basis of Russian behavior both towards Ukraine and Georgia, as well as towards a host of governmental and nongovernmental actors within Russia.

We were in an environment a year ago where people were willing to tolerate an awful lot of problems for Russian upside because they had cash and Russia looked relatively attractive. But in this environment, where people are seriously unwilling to deploy capital, these arguments against Russia are suddenly becoming very serious.

You compared Russia today not to its situation in 1998, when it defaulted on its foreign debts, but to 1989, when the Soviet Union broke apart. Why?
The breadth of potential scenarios in Russia is probably greater than that of any other significantly sized country in the world. The reason for that is not that Russia is an authoritarian state, but that Russia is an authoritarian state with an extraordinary amount of power concentrated in the hands of one individual: Prime Minister Putin. Putin is probably the single most powerful individual in the world. He's had a pretty good ride so far: he's had his 80 percent approval rating, he's had very strong economic growth, he's had increasing geopolitical clout over the course of the last several years. But now he is facing a very serious downturn, larger than anything we've seen since the Great Depression. It is absolutely unclear in that environment that Putin is prepared to stick with the basic principles of the Russian political system.

Which principles are you talking about?
The ability of Western multinationals to do business. The ability of NGOs to exist. The ability of folks to engage in demonstrations. The ability of folks to create alternative political parties. All of these things, as imperfect as they may have been, have evolved over the course of the last 20 years. That might continue, but it might not. We have to recognize Russia really could go in any direction.

An extreme crackdown is one of those scenarios?
An extreme crackdown is one of those scenarios. In a way that it wouldn't be in China, it wouldn't be in India, it wouldn't be in Brazil.

Is it too late for the Russian economy to right itself to fix its problems?
It might be too late, and if the world actually does sink into a depression—I don't expect that, but you are starting to hear some economists talk about that—and oil prices slip from $40 to $20, and they slip for a while, how is Russia paying for this? There's no social safety net for a lot of these guys working for individual corporations, for industries that are in the middle of the country. They're out of work, there's no one supporting them—what are they going to do?

They take to the streets.
That is certainly a possible scenario.

How serious are the protests we ' ve seen recently?
They're very small so far. But I also think that the level of pain that Russia has taken so far is relatively limited. They have deployed capital. [Igor] Shuvalov, the deputy prime minister, made it clear that they're going to continue to. The question is, are they going to be able to continue to? We've got open questions on that.

Since you're in Moscow right now, can you assess the mood?
The mood in Moscow is pretty damn bleak. I just came from Davos and people said the mood in Davos was bleak, but the mood in Davos was not bleak—the mood in the Russia Forum is bleak. At the Russia Forum last year there was enormous talk of Russia as a safe haven, the level of petrol arrogance, this unstoppable juggernaut with enormously popular Putin at the front. And now there's a feeling of, Oh, my God, this place is in free fall. The bears way outnumber the bulls at this conference.

Do average people have the same sense, or do the state-controlled media shelter them from economic and geopolitical realities?
It probably shelters them from the geopolitical realities, but the geopolitical realities for Russia aren't actually problematic. The Russians just did their best to kick the U.S. out of this base in the Kyrgyz republic. I took a bunch of questions on this: "Is this a dramatic setback for the U.S.?" It was the first time I've ever heard "Kyrgyz republic" and "dramatic" in the same sentence. But economically, you can say whatever the hell you want in state-controlled media, but the economic realities are the realities. I'm in Moscow, and it's easily as dramatic a change as you've seen in New York in the last six months, and probably a little more.

I want to talk about China, too. It ' s got some surface parallels to Russia authoritarianism, nationalism, protests. But you reach the opposite conclusion for China, arguing that it ' s a red herring. Why?
China has an enormous amount of flexibility in terms of what they can actually do and how they can deal with this crisis. China has been growing, on average, 10 percent a year for 30 years. I keep hearing that if growth slips under 8 percent, China is gonna explode. Who did that math? China has built an enormous amount of political capital over the last 30 years. The government is responsible for that growth. So the Chinese people feel pretty good.

You say that Chinese Prime Minister Wen Jiabao really shined during Davos. Why?
Because he came across as a leader. A year ago, China was saying, Oh, we're just a little developing country, don't pay attention to us, we can't do anything. This was a much greater sense of reality; the Chinese view of itself and the external view were coming closer. If the Chinese economy slips right now, the average Chinese is prepared to take that. And to the extent they're annoyed, they largely blame the West. They believe—and there's some justification to this—it's precisely Western expressions of free-market capitalism that got you in this mess. The danger, of course, is to think that that is a validation of their model.

Why shouldn't it be interpreted that way?
The fact that Americans went for fetishized hypercapitalism and allowed leverage to get out of control does not mean that absence of rule of law, complete opacity and state capitalism is the way to go.

I like that term, " fetishized hypercapitalism. "
Would you quote me on that? That's actually a pretty good turn of phrase. But seriously, the second half of that is equally important. That does not mean that the Chinese system is a good system or is an effective system. Long-term, the Chinese have serious problems. Short-term, their ability to maintain the support of the Chinese people and focus massive state subsidies in boosting both infrastructure spending as well as demand is pretty serious. And I think that will come across as one of the relative success stories in the context of this crisis.

I was struck that Wen Jiabao said something along the lines of, " The greatest thing we can do for the world is manage our own affairs adequately. "
If you asked me to point to the one problem statement of his speech, that was it.

Because they ' re not taking leadership on an international level?
Where are the Chinese going to be at the G20 meeting? Relatively absent. Where are the Chinese going to be on climate change? Don't even ask. Where are the Chinese going to be in terms of creation generally of new international financial architecture? They're not there. The notion of global stakeholdership still hasn't really taken hold in China. But the other thing that Americans better be listening to when they hear that is, for those of us that have gotten used to the Chinese buying lots and lots of Treasuries—they may be there right now, during a crisis, but in three or five years they're not going to be. And that's clearly going to undermine the U.S. dollar as global currency, and it's also going to mean the U.S. is going to have to print a heck of a lot of cash to get through this, and as a consequence you're going to see massive inflation. It's a serious issue, and this really does start to shift the balance very quickly away from the dynamism of U.S. leadership globally.

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